Broadband and cellular carriers are threatening the viability of the digital services Silicon Valley keeps inventing

InfoWorld|Jan 18, 2013

If you're a techie who lives in an urban area, you may not realize that the Internet fueling the wonderful connected experience we have from our PCs, mobile devices, TVs, and more is at a tipping point. Whether it leans in a positive or negative direction is the question. The consumerization phenomenon is predicated on connectivity being widely available, affordable, and able to keep up with our growing information demands.

Even as more data-intensive services come online -- voice recognition à la Siri, location-based recommendations and friend tracking, video on demand, text and voice and video messaging, anytime information access and services access from banking to restaurant reservations, and the amazing stuff coming out of Silicon Valley and its global counterparts -- the reach of our fixed and mobile broadband has stagnated. And the price is going up. That's a recipe for a digital fiscal cliff.

Like so many developments, the tipping point didn't suddenly appear. It's been slowly approaching, so it's easy to miss. For me, several little threads came together before I realized a larger tapestry lurked beyond view:

I recently spent a long weekend with family in California's Mendocino coast, where we were reminded how tenuous wireless coverage is outside the main population centers. A family friend in a tiny coastal town complained that her area's DSL service had been discontinued because it wasn't profitable for the provider, leaving her with no online access (cellular data isn't available either). Luckily, residents' complaints got the service restored.

I've noticed steadily worsening cellular service from Verizon Wireless in my San Francisco neighborhood. A Sprint-using colleague has seen similar degradation in that network in the Bay Area. When I recently tested Windows Phone devices, I barely got service from T-Mobile in this region, and none in much of California's Central Coast. AT&T's service has long been spotty here as well. Too many users may be the reason for the Verizon and Sprint issues, considering their service has been better. T-Mobile and AT&T, on the other hand, have long offered insufficient capacity in this area. Yes, I know they offer great service in other parts of the country, and Verizon and Sprint can be horrible or even nonexistent elsewhere. That's the point: Cellular service is unreliable and inconsistent. Despite all the ads touting their investments, it's not improving, even as they replace one network for another.

Fixed broadband providers -- cable providers and the old-fashioned telcos -- have begun to "experiment" with tiered pricing, meaning extra fees kick in when you exceed certain levels of data usage, just like with cellular plans. In the cellular world, we saw the entry-level data plans set at absurdly low levels, essentially forcing everyone to pricey plans with more capacity than needed. You can bet the same will be true in the fixed-broadband world, once the experiments on how far they can abuse us are over. The result will be the death of online video, leaving that business to the cable companies, who, shockingly, are typically owned by or own media companies -- a coincidence, of course.

The carriers, after failing for years to offer their own mobile payments system, have essentially blocked competing services from companies like Google and its Google Wallet. Research in Motion recently announced its own mobile payments technology, but the carriers must allow it on smartphones. Why? It has nothing to do with the carriers -- it's just another app. You know the reason: The carriers want the market empty until they're ready in, say, 2017. I suspect the only force that can overturn their block is Apple.

The respected telecom-focused advisory firm Ovum recently recommended to European carriers, whom the E.U. has been forcing to abandon their more rapacious practices, that they slow the growth in investments in their networks to a fraction of their rate increases on customers -- essentially, recoup lost profits by letting the service suffer. In the United States, telco investors usually cry poverty when carriers decide to make major investments to get a competitive advantage. Never mind that carriers typically have profit margins of 40 to 50 percent, higher than most other industries, including grocers (1 percent), electric utilities (7 percent), defense contractors (7 to 12 percent), publishers (20 percent), games makers and the music industry (11 percent each), and even cable and satellite providers (30 percent). Financial services companies (when they're not suffering from the effects of their own scandals, which they get us to bail them out for) and software companies have the highest profit margins: around 50 percent.